TalkMed Group - RHB Invest 2017-10-02: Venturing More Into Stem Cells

TALKMED GROUP LIMITED 5G3.SI

TalkMed Group - Venturing More Into Stem Cells

TalkMed sees huge potential in stem cells as a way of treatment moving forward, particularly for cancer. It has a certified lab to produce MSCs and is likely to open another lab overseas in late 2018 to produce CAR T-cells.
While we expect costs to increase, revenues from these ventures are likely to only come in when these treatment processes are approved in Singapore. As a result, we maintain our BUY call with a lower DCF-backed SGD0.69 Target Price (from SGD0.73, 17% upside) after adjusting our NPAT down by 5.5% for FY17F-18F.

Mesenchymal stem cells (MSCs) are usually found in bone marrow. However, they can also be isolated from other tissues – including cord and adipose (fat) tissues. MSCs are currently used in regenerative medicine and therapy overseas for aesthetics and other purposes.
TalkMed Group (TalkMed) sees huge potential in this area, in which its 60%- owned Stem Med Pte Ltd has embarked on a research and clinical programme for MSC use in the region. However, we understand that, in Singapore, cellular therapy can only be approved under the auspices of clinical trials. Hence, the main monetisation of these therapies domestically are likely to only come when the regulations change.

Cellular therapy for oncology is one of the most exciting discoveries in recent years. The latest US Food and Drug Administration (USFDA)-approved gene therapy product – chimeric antigen receptor (CAR) T-cells for blood cancers – has been priced at USD0.475m/treatment. Stem Med is constructing a specific Good Manufacturing Practice (GMP) lab to develop gene and cell therapies for cancer like CAR T-cells, and has recruited a scientific team – that includes a former head of manufacturing of advanced cellular therapy at King’s College London – to lead the development. The lab is slated to go operational in 4Q18.
The main sources of revenue for Stem Med currently are the processing and storage of adult and cord tissue stem cells, and supporting bone marrow and stem cell transplant services. It supports the Parkway Cancer Centre Singapore’s (PCC) Bone Marrow Transplant Centre – operated by TalkMed – the largest private bone marrow transplant centre in the region.

We came away from our trip feeling positive on the prospects and synergies envisioned with TalkMed’s services. However, Singapore regulatory requirements are key for its ramp up. Management believes this is likely to change in the next few years and it aims to be the first mover in Singapore when such changes occur.
We do expect more costs and losses to be incurred by Stem Med going forward. Hence, we cut TalkMed’s FY17F-18F earnings by 5.5% to account for these additional losses from its subsidiary. This results in a lower DCF-backed SGD0.69 TP (from SGD0.73).
However, we believe the stock is trading at an attractive valuation due to the temporary drop in earnings post the suspension of key man Dr Ang Peng Tiam, and accompanied by M&A activities – a near-term possibility.
Key risks include the non-renewal of its consultancy restatement agreement.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-02

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.69 Down 0.730